It’s no secret that Donald Trump was elected president due in large part to his promise to negotiate better trade deals on behalf of the American working class.
The spirit of this kind of campaign promise is appealing to anyone who isn’t a left-wing communist dressed up as a Democrat. After all, those of us who voted for Trump are patriotic Americans who want to see our beloved country thrive. We’re tired of being told that America’s phony problems (systemic racism) are our fault and America’s real problems (abysmal economic growth) are here to stay. Going from a President who actually told all of America “you didn’t build that” to one who, in a thousand ways, said ‘yes we damn well did and we’ll do it again’ is inexplicably gratifying.
Having said that, now that Trump is elected it’s important that we stay intellectually honest and hold him accountable. Hillary Clinton is no longer a threat. Donald Trump is our President-elect. We should be as vigilant as we are optimistic.
On more than one occasion, Trump has floated the idea of imposing large tariffs on steel products entering the United States. The logic is simple enough to follow. American steel companies are able to produce and sell a ton of steel for a specific market price and maintain profitability. China also produces a ton of steel and ships it to the United States but sells at a lower market price, undercutting American steel companies. How does China manage to set the market price even after adding the cost to ship their product overseas? Subsidies. The Chinese government subsidizes their steel production, driving the cost to produce a ton of steel down, thereby allowing them to sell at a lower price in America.
American steel companies argue that this is an unfair playing field and America should impose a tariff that would level the prices. If China subsidizes their steel production to the tune of 35%, then the American government should impose a 35% tariff on every ton of steel entering the United States. That would level the playing field for American companies to compete with China. Sounds fair, right?
No, it’s not fair.
Reiterating the fact that we’re Trump voters and we want American businesses to thrive, let’s give this idea an honest assessment and avoid the ‘anyone who disagrees with this hates American workers’ crap. Here are a few realities of this trade policy:
The downstream effects of these tariff policies suck.
If we tax a ton of steel 35% via a tariff, that means all of the American companies buying that steel will pay 35% more for their material costs. That is not helping America’s construction sector, their employees, or their customers, something Trump is promising to do. It’s true that artificially raising steel prices is, at least in the short term, good for American steel companies because they’ll be able to sell steel at a much higher price. That’s why they have lobbyists in Washington DC demanding the government protect them from China’s steel subsidies. The immediate effect is noticeable and tangible for them. What is less noticeable but extremely significant are the downstream effects of raising steel costs, something that hits every part of the economy and, eventually, steel companies. After all, higher steel prices are only good if someone is buying it. When the construction sector has to tighten it’s belt, that won’t be good for America steel producers. The bottom line is that free trade will always be the best policy for any economy because the central planners of government can’t impose profitability.
We wouldn’t apply this logic anywhere we’re more familiar with (like gas or healthcare)
Think about it. Nearly everyone reading this has never bought a truck load of I-beams, but they’ve all probably bought quite a bit of gasoline. In the last couple of years we’ve enjoyed much cheaper gas at the pump due mostly to a significant increase in output from OPEC. They’ve been attempting to flood the oil market and drive prices down in order to squash the emerging American fracking competition who has trouble staying in business with such low oil prices. While American oil companies are finding new and innovative ways to stay afloat with lower prices, the rest of America is enjoying a steep discount at the pump. This benefits every single American who buys gas, every business that runs on it, and every downstream transaction thereafter that is enjoying more free capital. But what would happen if we applied Trump’s steel tariffs to foreign oil?
“These foreign oil companies are killing us! American companies can’t compete with their unfair trade practices! We’re going to level the playing field! We demand fair trade!”
It’s the same thing. Say Trump imposed a 35% tariff on all imported oil in order to ‘level the playing field’ for American oil producers. Would oil go up 35%? Yes, at least that much. Would American oil companies enjoy selling their product at a higher price? You bet. But would the rest of America enjoy going back to higher gas prices and higher costs on their products that have to be shipped from point A to point B? I kind of doubt it.
How about medical costs? Trump himself says that we’re going to free insurance companies to sell across state lines. He rightly states that this will increase competition between insurance companies, driving prices down and quality of services up. I’m for that. Trump is for that. And what is that exactly? Free trade. If South Carolina decides to protect it’s insurance companies by charging a 35% tariff on all out of state insurance, does that help Blue Cross Blue Shield? Yes. But it also means every single South Carolinian has to pay 35% more for health insurance. That’s bad.
I understand that China is undercutting the steel market and American steel companies don’t like it. But consider this. What is China ultimately doing? They’re paying for our steel. That’s the side of the story that the protectionists won’t tell you. When China spends its own money to drive down the cost of steel before it hits American markets, that’s money that would’ve otherwise been spent purchasing that steel at a higher price here by us. They’re giving us a discount and we’re complaining about it for God’s sake! If Trump is really concerned with China screwing American businesses, the least he could do is continue to let them subsidize our economy.